Harley-Davidson Stock Has Revved Up. But It Could Quickly Reverse Course.

By

Daren Fonda

Jan. 28, 2019 5:30 a.m. ET

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Harley-Davidson is set to report fourth-quarter earnings on Tuesday before markets open. The stock has been rallying on hopes that sales trends will improve. The shares yield 4.1% and look cheap at 10 times forward earnings. But things may go from bad to worse, according to UBS analyst Robin Farley, who has a Neutral rating on the stock.

The back story:
Harley-Davidson
stock (HOG) fell 33% in 2018, but has rallied more than 8% this year, beating the
S&P 500’s
gain of about 6.5%. Investors appear to be holding out hope that years of declining sales may start to abate.

Analysts forecast profits of 28 cents per share, down from 38 cents in fourth quarter of 2017. Global bike shipments are expected to fall by 4.1% in 2018 to 231,568 units, according to consensus estimates compiled by FactSet.

But things look worse at the U.S. retail level. Based partly on channel checks in October and November, retail sales will decline by double digits in 2018, according to UBS’s Farley. That would be worse than 2017’s 8.5% retail sales decline. Harley, of course, is also feeling the heat of President Donald Trump’s trade war. After Europe slapped retaliatory tariffs on bikes made in the U.S., Harley said it would move some production to Europe, prompting Trump—a former booster of the company—to call for a boycott.

The plot twist: The average age of a Harley motorcycle buyer has been rising for years. But as new-bike buyers reach their early 50s, those dreams of open-air touring down country roads may be colliding with the reality of aging hips and slower reflexes—making a Harley more of younger person’s purchase.

“As Harley’s average buyer age moves further into their 50s, the view that they are too old to ride may become more of a headwind for HOG,” Farley wrote in a note last week. But younger riders are more price sensitive and tend to buy used bikes. Their interest in a new Harley is at about half 2016 levels, and purchase intent among customers with average incomes of $40,000-$99,000 is softening, according to Farley.

Harley has done well selling high-priced touring bikes, which have pushed up margins, and sales got a lift from a new engine introduced in 2016. Those trends might be temporary, though, and could make comparisons tougher in 2019.

Harley has another trick up its sleeve: It’s betting on electric bikes, with plans to launch a new model, the LiveWire motorcycle, in August. It’s a gorgeous sport bike with no clutch or gears, going from 0-60 miles per hour in 3.5 seconds, Harley says. “The loudest sound you’ll hear is your heartbeat,” the firm’s sales pitch goes. That would be the opposite of the classic Harley growl—a key selling point for buyers. And this won’t be a cheap bike, starting at $29,777. Dealers may love the eye candy, but they will have to spend more to support it, installing charging stations and spending heavily on capital expenditures at a time when operating margins have been declining.

Moving forward: Investors don’t expect Harley’s sales to rev up. The question is the rate of decline, and the direction it’s heading. The stock has been popular among value investors who like its stable free cash flow and dividend. But a declining top line puts that free cash flow at risk. Combine that with tariff issues and margin pressure, and Harley’s stock could reverse course.

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